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Sunday, January 29, 2006

Structural Change in Monetary Policy

Here are scatter plots of monthly non-borrowed reserves (horizontal axis) and the monthly federal funds rate (vertical axis) for the full sample from 1959-2005 and before and after 1982:

I was looking for a dummy variable and piecewise linear regression example for my introductory econometrics course. This ought to do the trick, though piecewise might be a bit of a stretch. I can also ask about potential problems with the approach, e.g., for one, ask how the presence of a trend in NBR might affect the conclusions. For example, here's what happens with a very quick, very simple (and crude) linear detrending of NBR:

Looks like two different policy regimes to me. Finally, here's the last diagram with the observations connected through time:

The one obvious outlier (FF=3.07, NBR=6.68) is September 2001 when reserves were increased following the terrorist attacks. 

    Posted by on Sunday, January 29, 2006 at 02:52 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)

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